A strong end to 2020 has paved the way for America’s top banks to buy back more than $10bn of their shares in the first quarter, as the loan losses of the pandemic year recede and capital markets fire on all cylinders.
JPMorgan Chase is expected to lead the way with buybacks, spending about $3.2bn on its own shares by the end of March, based on analysts’ forecasts compiled by the FT. The remaining $7.4bn or so is spread across Bank of America, Citigroup, Goldman Sachs, Morgan Stanley and Wells Fargo.
Analysts expect the buybacks to come in close to the maximum permitted under a Federal Reserve decree in late December, which surprised investors by allowing banks to resume buybacks and return billions to shareholders while also flattering banks’ earnings per share.
The banks voluntarily halted share repurchases last March, as the pandemic threatened a steep recession and catastrophic loan losses. The Fed’s June stress tests banned buybacks until the end of 2020 and capped dividends at a level linked to recent profits and payouts.
The first quarter’s repurchases will be capped so that the sum of dividends and buybacks cannot exceed average quarterly earnings over the previous year. “They may not all hit the maximum, but we expect them to get close to it,” said Jeff Harte, analyst at Piper Sandler, noting that banks’ capital levels had been getting “stronger and stronger” over 2020.
Mike Mayo, analyst at Wells Fargo, believes the largest US banks excluding Wells could buy back 15 per cent of their shares over the next two years. “The big question (for banks) is going to be how aggressive are you going to be on buybacks, over what timeframe?” he added.
The European Central Bank last month ruled that the strongest eurozone lenders would be permitted to resume paying dividends from the start of this year, subject to tough conditions on profitability and capital ratios.
JPMorgan marked the Fed’s announcement on December 18 by saying its board had granted authorisation for a $30bn buyback programme, over an indefinite timeframe. Mr Harte said that would be a multiyear process.
Morgan Stanley’s board authorised a $10bn buyback programme in December. Analysts said the bank could do about $1.8bn in the first quarter, based on their expected profits for the final three months of the year.
The other lenders have promised more details of their payout plans in their first-quarter earnings announcements, which begin on Thursday with Wells Fargo. That bank’s approach is most in doubt. Analysts say they could do about $150m, the lowest of the pack, but the bank has cautioned that it may not do any, as it grinds through a big restructuring programme.
The six banks are expected to post fourth-quarter net income about 10 per cent below 2019’s level and revenue roughly 5 per cent lower year on year, based on consensus forecasts compiled by Bloomberg. The high points will be a continuation of the capital markets boom that powered earnings in the second and third quarter, and better performance on credit.
“I think we will get reserve releases,” said Charles Peabody, analyst at Portales Partners, referencing the accounting process where banks boost profits by releasing loan loss charges taken in earlier periods. He added that JPMorgan boss Jamie Dimon had already said banks were over reserved if the credit cycle normalises.
The six banks booked more than $65bn of charges for future loan losses in the first nine months of the year. On December 9, Citi finance chief Mark Mason told a conference that, given the economy’s improvement, “you’re probably more likely to see releases when I think about reserves than we are to see builds”. Analysts expect fourth quarter provision charges to come in at about $6.5bn across the group.
Brian Kleinhanzl, analyst at KBW said that “the worst of the credit outcomes is off the table, but there is still uncertainty” about how the cycle will play out, while other analysts said banks would be conservative about releases because the pandemic’s trajectory could change quickly.
Trading and investment banking have been a bright spot for banks for much of the year, as the pandemic spurred a flurry of debt issuance and dealmaking, along with a surge in the volume of stocks and bonds changing hands.
“They’ve pretty well telegraphed that its going to be a strong capital markets quarter,” David Konrad, analyst at DA Davidson said.
Wells Fargo’s Mr Mayo said capital markets would be “stronger for longer” as companies went on the offence with capital raises and deals, while trading revenues would not stay at 2020 levels, they would remain strong.